The pension system is a substantial bargain for the state

Testimony of Paul Toner , President of the Massachusetts Teachers AssociationRelative to Pension Reform Legislation – House Bill 35 Before the Joint Committee on Public ServiceApril 7, 2011

Chairwoman Clark, Chairman Scibak, members of the Committee on Public Service, my name is Paul Toner, and I am the president of the Massachusetts Teachers Association. The MTA represents 107,000 educators, all of whom are members of the Massachusetts Teachers’ Retirement System, the Massachusetts State Employees’ Retirement System or a municipal pension system.

I would like to thank you for the opportunity to provide testimony on House Bill 35, An Act Providing for Additional Pension Reform and Benefits Modernization.

The MTA supports efforts to strengthen and improve the public-sector pension system. It is crucial to recognize, however, that the adjustments that have been made to the system over the past decade have created a system in which employees fund the vast majority of their pensions. These adjustments have created a stable pension system. The MTA does not support efforts to reduce the benefits of future employees, who in many instances will be funding over 90 percent of their pensions through their individual contributions. As a result, the MTA would like to be recorded in opposition to House Bill 35.

Addressing unfunded pension liability has been used as the rationale to cut benefits. The idea is that this, in turn, would reduce the state’s portion of the “normal cost” and provide additional money to pay down the unfunded liability. This reasoning fails to recognize what caused the unfunded liability and then makes a quantum leap by recommending that the burden of this liability be assumed by employees who have yet to be hired.

In 2000, the state contributed 40 percent of the total normal cost; by 2010, the state’s share of the contribution had decreased to 23 percent. This corresponded to the changes in employee contribution rates. As employees’ contribution rates have increased over the past few decades, the employer’s contribution — the state’s contribution — has declined. In 2000, the state contributed 5.2 percent of payroll toward the normal cost of employee pensions; by 2010, this had decreased to 2.7 percent of payroll. Without any change in the current benefit levels, the normal cost is expected to fall significantly over the next 20 years — and 100 percent of this savings will be recouped by the state. This is mainly due to the fact that each year, more members join the system at the new contribution rates. Thus employees will fund a greater portion of the total normal cost, which will reduce the state’s obligation.

We agree with the Governor’s proposal to extend from 2025 to 2040 the date by which the pension system will be fully funded. This step will help ease the burden of the unfunded liability. But it is important to remember that this shortfall results from the downturn in the stock market and a lack of consistent long-term funding in the past by the municipalities and the Commonwealth — not from any problem caused by public employees.

We praise the Legislature and the Governor for their continuing support of a defined benefit retirement system, which is a bargain to the Commonwealth and the taxpayers. We understand that many members of the public do not understand the significant cost savings the pension system provides the taxpayer, which is estimated to be $373 million in 2010 alone. The alternative would be to contribute to the Social Security system at 6.2 percent of payroll.

In 2009, the Special Commission to Study the Massachusetts Contributory Retirement Systems released a report that “agreed from the outset that, as a matter of fiscal policy, Massachusetts should continue to oppose Social Security coverage of its public employees, because the costs would exceed the benefits.” The report stated: “While Massachusetts employers and employees each would be required to pay 6.2 percent of payroll to Social Security, only three quarters of that amount would pay for benefits; at least one quarter would go to cover Social Security’s legacy costs, associated with having provided benefits in excess of contributions to early generations.”

It is important to say here that while the MTA does not support the Governor’s proposals to reduce the benefits of new members, we do support several of the provisions in the Governor’s legislation that we believe will improve the system.

The MTA applauds changes proposed in the Governor’s bill to allow retirees who married same-sex partners in the first year after same-sex marriage became legal to change their retirement options in order to provide benefits to their spouses.

The MTA believes that the Governor’s changes to creditable service buybacks are reasonable and will provide the system with an infusion of much-needed capital, which can be invested immediately.

If amended to protect collectively bargained wage increases, we believe that the Governor’s “anti-spiking” proposal will add an important assurance that no one can game the system to increase his or her benefit.

While we understand the concern generated by the unfunded pension liability and are fully supportive of proposals that would strengthen the Commonwealth’s commitment to reach fully funded status as soon as possible and strictly adhere to funding the normal costs in the future, we firmly believe that major changes in the benefits of future employees are not needed. It is worth stressing again that under the system’s current configuration, employees are already paying the vast majority of the normal cost of their pensions.

As things stand, newly hired teachers will pay about 95 percent of their pension costs, according to the Special Commission to Study the Massachusetts Contributory Retirement Systems. We therefore believe that the pension system is a substantial bargain for the state, and the MTA cannot support the sections of House 35 that unfairly affect these workers. Indeed, the proposals to cut benefits for new members do not make sense when they are considered on their own merits.

Last week, an article appeared in The Boston Globe about retiree benefits at several local private institutions of higher education. The story reported that “(r)etiree benefits are important (to these institutions) because they are part of the packages universities use to compete for talented professors and staff.” MIT’s vice president for finance said: “We have a deep belief of providing a retirement benefit. Our mission is driven by a long-term association with faculty, having generous benefits that attract people, so they don’t leave to go elsewhere. I think it’s a crucial factor.” The same holds true in public education. We need to be mindful of what it takes to draw highly talented educators to our public schools, colleges and universities and keep them in the profession. We must not shortchange our students by reducing an important part of the package we need to attract the best people to educate them.

We appreciate the Administration’s willingness to review the impact of the proposed legislation on teachers and other Group 1 employees and look forward to working with the Legislature to ensure that any changes protect the benefits that these workers pay for through their contributions to the system.

The MTA would also like to be recorded in opposition to the bills before you today that seek to reduce the retirement benefits of employees who fund the lion’s share of that benefit through their personal contribution.